Adani Transmission (NSE:ADANITRANS) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Adani Transmission (NSE:ADANITRANS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Adani Transmission, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.06 = ₹27b ÷ (₹516b - ₹66b) (Based on the trailing twelve months to December 2022).

Therefore, Adani Transmission has an ROCE of 6.0%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 7.3%.

Check out our latest analysis for Adani Transmission

Above you can see how the current ROCE for Adani Transmission compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Adani Transmission here for free.

What Does the ROCE Trend For Adani Transmission Tell Us?

We weren't thrilled with the trend because Adani Transmission's ROCE has reduced by 70% over the last five years, while the business employed 309% more capital. Usually this isn't ideal, but given Adani Transmission conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Adani Transmission probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

The Bottom Line On Adani Transmission's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Adani Transmission is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 525% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Like most companies, Adani Transmission does come with some risks, and we've found 2 warning signs that you should be aware of.

While Adani Transmission isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.